Nickel Industries Limited (OTCPK:NICMF) Q3 2023 Earnings Conference Call October 31, 2023 6:00 AM ET
Company Participants
Justin Werner – Managing Director
Chris Shepherd – Director and Chief Financial Officer
Conference Call Participants
Niel Botha – Ninety One
Justin Werner
Thank you, and thank you everyone for your attendance at this quarterly results call. Once again pleased to report record production and – which underpinned record EBITDA from operations of US$120.7 million. We’re now seeing the full impact of a fully ramped up Oracle Nickel as well as a significant decrease in operating costs. We’re also pleased to have our first contribution from the HNC HPAL and that delivered 1,410 tons of nickel in mixed hydroxide precipitate for just the two months that we held that 10% interest. That implies an annualized run rate of in excess of 70,000 tons from the HNC HPAL so it’s performing very well.
Both numbers the RKEF EBITDA of US$97.6 million was 117% higher than the June quarter despite a small decrease in the weighted average contract pricing. As I mentioned, there was a decrease in operations between 13% to 22%, primarily driven by lower electricity prices, coal and nickel ore prices and we saw a significant increase in the EBITDA per ton sold that was up 85.8% from 1,500 in the June quarter to 2,849 in the September quarter. ANI and ONI continued to drive our production and EBITDA and they experienced margins in excess of 3,247 tons and 3,502 tons respectively. Pleasingly we also had record mine production 3.7 million wet metric tons that was a 33% increase on the 2.7 million tons in the June quarter. That flowed through into record mine EBITDA of US$23.1 million, a 93.6% increase on the June quarter of US$12 million and we’re already starting to see the results of the recently opened haul road.
If I could just ask you to turn to Slide 3 please. Here in the table you can see a summary of all of the key numbers as I said record production 33,852 that puts us on an annualized run rate of well in excess of 120,000 tons of nickel, well above BHP who sits at about 83,000 a year, and they’ve been operating in Western Australia since 1966. The next largest is Independence Group with 36,000 tons, so that 33,852 tons of nickel for the quarter, which includes the HNC production is a new record for Nickel Industries’ production.
I don’t know if other people are having trouble, but the presenters they – but it appears like the pages haven’t moved. If you can please move it to Presentation Slide 3. Pleasingly, if you look at the bottom of the table on Page 3, we have US$827 million of cash and we’ll touch on that a little bit later on and what that means for our ENC and HPAL aspirations.
Turning to Page 4 of the presentation, you can see here the clear and consistent ramp-up quarter-on-quarter. September 2022, we were at 20,275 tons, September of 2023 we’re now at 33,852 tons. We did also acquire an additional 10% interest in the ONI, which we also completed during the quarter.
Moving to Slide 5, please. As I said, a record quarter of production at the Hengjaya mine, 2.7 million tons of ore was mined. The significant EBITDA increase was driven predominantly by an increase in saprolite. Last quarter, we sold 227 tons of saprolite. This quarter that was one million. The opening of the haul road has allowed us to push all of our saprolite sales through the jetty and all of our limonite sales down the haul road.
And moving to the next slide, Slide 6, which is the opening of the haul road. You can see last year, we did 3.5 million tons of ore. We sold for an EBITDA of US$54 million. We’re now looking at ramping that up and well on track to achieving 10 million tons per annum. So assuming a similar margin, you could expect a tripling of that EBITDA number. And we are starting to see that come through already in this quarter with US$23.1 million, which is 50% – in one quarter, it’s 50% of the full year result for 2022. So, we are really starting to see the dividends from the opening of that haul road.
Moving to Page 7, we were pleased to announce post the quarterly period a positive final investment decision for the ENC HPAL. NIC will own 55% of that. It has a CapEx guarantee of US$2.3 billion. It will be the first plant globally to produce the three key Class 1 nickel products, being MHP, nickel cathode and nickel sulfate.
If you look over at the table on Page 7 there, you can see that in terms of capital intensity, it’s still lower than most of our Indonesian peers, who don’t have a CapEx guarantee, and it’s significantly lower than all the Western peers. Not only it’s coming to CapEx guarantee, it also has a timeframe guarantee, a nameplate guarantee, and a 15-year tax holiday.
I’ll let Chris touch a little later on the funding of ENC, but we’re now fully funded given the recent placement by UT of Australia 943 million at $10, which is a 30% premium to where we’re trading today, and the recently announced 400 million loan facility from BNI, one of Indonesia’s largest banks. Slide 8, you can see on the far left there, the average that NIC is paid across all of our projects for our nickel units, and that’s US$19,650 a ton. On the right there, you can see a number of projects, battery and nickel, that have all demonstrated significance CapEx blowouts over a period of time.
Some of these projects have been continually increasing CapEx since as early as 2008, and still there’s yet anything to be built. I think this just further highlights the strength of the CapEx guarantee and the timeframe guarantee, and this slide clearly demonstrates that. And you can see the capital intensity there on the right. One of the recent Australian companies has come out with a nickel equivalent CapEx intensity of almost $120,000 a ton. So you have to think, theoretically, that’s never going to get built.
Slide 9, I’ll hand over to Chris just to touch on the balance sheet and how we see the funding of the ENC HPAL project over the next two years.
Chris Shepherd
Yes. Thanks, Justin. Since announcing our potential involvement in the ENC transaction in January, we’ve faced questions – most of 2023 on how we’re going to fund our 55% interest. We’ve always been very comfortable with that interest, and it’s one of the reasons why we paid our option to be able to take a positive FID later in the year. Once we were confident that we could comfortably fund the project, we thought it’ll be useful, after feedback from investors, both debt and equity over the last few months, to set out an illustrative overview for you over the next two years. In our announcement a few weeks ago, we set out the exact payment schedule on what our funding obligations are for the 1.265 billion. But over and above that, there’s some other key items being the April 2024 bonds of 245 million, the debt servicing of our existing bonds, as well as you can see there in the footnotes, assuming a bond refinancing, potential interest on new bonds, our NIC dividends and critically, with that number, important to note that we’ve only assumed the current dividend level to continue going forward.
That’s not to say if margins continue to improve like they have in this quarter that’s not to say that dividend – those dividends won’t increase, but for illustrative purposes, we’ve just left them at the current level. You can see our NIC dividend policy in our ASX release in July 2021 for further information.
And critically, it is all dependent on future margins. The funding sources, Justin’s touched on post the UT transaction. We’ve got a significant cash balance on 100% basis, it’s nearly $830 million, on an attributable basis, which takes into account our 80% interest in our project – in our Indonesian projects, it’s just over US$800 million. We’ve assumed interest on the attributable cash, which is in line with what we’re currently receiving. We’ve got BNI loan facilities of $400 million, which we secured – announced and secured earlier this month, an assumption around a bond refinancing in April 2024 of the $245 million of our existing bonds.
Again, that’s an illustrative example, and it’ll purely depend on what the prevailing market conditions are at the time. For example, if margins continue to improve and cash flow continues to improve, there’s nothing to say that we couldn’t just simply pay that out of cash, but we’ll assess it at the time. And what that basically leaves us with is our required cash flow from existing operations over the next eight quarters to fund the Excelsior Nickel Cobalt Project. So you can see there, highlighted in the blue, its US$550 million.
And then on the right hand side, you can see what our existing operations are that equates to US$69 million a quarter. We’ve obviously just announced a US$120 million a quarter. And our operations are the 12 RKEF lines, which are now operating at steady state production. And you can see the margin where they were at just over $2,800 a ton, which we don’t believe on a historical basis that is not an aggressive number at all.
You’ve got your Hengjaya Mine, which just contributed $23.1 million for the September quarter. And as Justin noted, we’ve only just commenced trucking on the haul road, so there’s potential for that that number to increase going forward as well as we increase from the 3.5 million tons to 10 million tons per annum.
And then finally, our final element of our existing operations is the HNC interest. For the September quarter, we announced 1,400 tons of attributable nickel, which critically was just for two months since acquisition. Importantly, there is no financial contribution of that production in our September quarter financials and the reason for that is we are still working through that with our auditors and our major shareholders at the project level being Huayou Cobalt and CMOC Group, which are both public companies. So I guess, the message from this page is investors and investors analysts need to just take a view on whether – when we just put out a quarter of $120 million for the quarter, we need $550 million for the next eight quarters to be considered fully funded. Justin, back to you.
Justin Werner
Thanks, Chris. If we could just move to Page 10. On the corporate front, pleased to complete the replacement to UT Tractors for A$943 million, as I mentioned, A$1.10 a share, 30% premium to where they’re currently trading. As part of that, UT had the right to appoint a member to the board and they’ve appointed Mr. Moriarty, CTO, who’s been appointed as a Non-Executive Director. He brings a lot of diversified experience and we welcome him to the board.
We completed during the quarter the 10% of the HNC, HPAL acquisition and as we touched on that, delivered 1,410 tons of nickel in MHP for the two months that we had that 10%. The payment for that 10% predominantly shares which is issued to Shanghai Decent. So we see that as a strong positive. And then we also moved to 10% interest of ONI. For the same amount that we originally paid when we first invested into the project.
So there was no markup, even though the project is fully ramped up and delivering very strong margins. Again, strong reflection of the good relationship that we have with Shanghai Decent or Jinshan.
Slide 11, we’ve touched on the $400 million loan facility with Bank Negara Indonesia facility split into two tranches, $200 million secured, which is secured against the company’s Angel Nickel Project, and $150 million unsecured with a further $50 million revolving credit facility.
Chris has just touched on these funds along with the recent placement and with the very strong EBITDA that’s been generated on a quarterly basis. It leaves the company positioned to fund its share. It’s 55% share of the HNC HPAL project over the next two years.
On an ESG front, pleased to announce that recently awarded triple BBB rating from MSCI, which is the highest ESG rating given to Indonesian based metals and mining company. We were also upgraded by S&P Global from 56% percentile to the 69% percentile on our ESG scores. We won a TrenAsia, which is a local award from local industry leaders and consultants for ESG excellence in the nickel sector. We’re once again shortlisted to be one of only two nickel mining operations in all of Indonesia to have a green proper rating, the other being Valley.
And then finally, on Slide 12, we are pleased to announce execution of the binding agreement for a 200 megawatt peak solar plus 20 megawatt hour battery energy storage system project within the IMIP that is Indonesia’s largest solar project. To give you some idea, the installed capacity in Indonesia at the moment is about 269 megawatt peak. This project is 200 megawatt peak, so almost doubles that. We’re not prepared to outlay any capital. We’re simply entering into a 25 year offtake agreement at very competitive pricing. What is attractive is that that pricing is fixed for the next 25 years with no inflation escalation.
But more importantly, this solar project, it’s intended that it will supply energy to the HNC HPAL. And we believe that HNC HPAL will be one of the lowest carbon intensive nickel producers globally. Not only one of the lowest carbon intensive, but the only diversified Class 1 nickel producer. And off the back of that, we’ve started the process to engage with Tier 1 global EV and battery makers. And so far we have a list of about 20 of the top names that are all showing strong interest and engaging with us. And so over the coming months we hope to be able to provide more details on any potential offtake from one or a number of those groups and perhaps even a small minority investment if that’s something that they’re looking to entertain.
With that that ends the presentation and so happy to turn over to Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Niel Botha with Ninety One. Please go ahead.
Niel Botha
Hi guys. Thank you very much for the presentation and update [indiscernible] So maybe just a few questions from my side. Firstly, you did mention the HNC project you’re still trying to figure out how to treat that in your sort of account? Sort of is there indication of what the best way would be? And then maybe sort of indication of asset itself, I mean like currently sort of what margins are you seeing at that asset? And sort of what level of earnings could that contribute just to sort of get a bit of sense.
Chris Shepherd
Hi Niel, I’ll take the first bit. It’s partly just the accounting. We’re working out between equity accounting and investment in associates. Obviously, we’re not consolidating the number came as an interest. But that also flows into the disclosed. And I’ll let Justin talk about margins. But it goes into disclosure on what we can and can’t disclose. We had a call this morning, and similar questions are coming up from our earlier call.
We – still we’re a 10% minority interest with two very large shareholders or very large public company shareholders, which don’t have to disclose the numbers specifically on HNC. So we’re just trying to work through with them what we are able to disclose and when we can disclose it such that we’re not prematurely disclosing what they don’t want us to. We’re not about to enter into a project – into a partnership, a long-term partnership with two other public companies and suddenly step off on the wrong foot. So we’re working through on that with them. So it is difficult to give more color. I don’t know, everyone is trying to get more color around where the HPAL will be.
I guess the – one bit of additional information that’s coming your way is the independent expert as part of our AGM, the upcoming AGM. And I expect the notice of that to go out probably within the next week. There’ll be an independent expert’s report attached to that. And then there’ll be a little bit more color around HSE on that for investors and analysts. Justin, do you want to add anything there?
Justin Werner
Yes. Thanks, Chris. I think Chris has covered off on it. But typically what we see is the newer RKEF lines delivering sort of margins from $3,000 to $4,000 a ton. HPAL delivering margins sort of $7,000 to $10,000 a ton. So typically superior margins from – far superior margins from the HPAL. As Chris said, we’re just still working through how we possibly report or present that. But I think as Chris also alluded to, there’ll certainly be a lot more detail and clarity in the independent experts report, which will be based off the feasibility study and some of the actual operating numbers that we’re seeing in the country.
Niel Botha
Okay, perfect. That’s very clear. Thanks very much on that. And then maybe just one on the cost side, I mean, given sort of coals increased recently, when do you expect that to flow through on the cost side and to sort of impact cost? Is that sort of a quarter delay or sort of how long do you generally take to see that?
Justin Werner
We are still optimistic of the – containing the coal and power costs. We’re yet to see any flow through on that as yet. And in fact, we have seen, obviously, a significant decrease in costs this quarter. And that hasn’t just purely been driven by input costs. It’s also been driven by plus some optimization across a number of the plants. So we aren’t anticipating in the near term any significant increases in our power prices for now.
Niel Botha
Okay. Perfect. Thank you very much. And then just a final one from my side if I may. On the solar project funding agreement you signed, and when is it expected to be operational? And is that off-take for the entire park and you only get a portion of that? Or is the entire off-take from that project for your use?
Justin Werner
It’s, yes, 100% for NIC. The timing will coincide – it should coincide with the commissioning of ENC, so those two line up very well. And we would anticipate 100% of the power going into ENC. Should the solar project come online earlier, which I doubt but if that’s the case, then it will simply be diverted into our existing RKEF operations until the ENC HPAL is ready and able to take it.
Niel Botha
Okay. Great. And so that is about what percentage of the overall power needs of the plant?
Justin Werner
Yes. So HPAL has bigger power requirements compared to RKEF. So for example, our HNC plant, 60% of the power actually comes from the sulfuric acid plant. So in the manufacture of sulfuric acid, a significant amount of heat is generated and that’s converted into energy. And so, look, we – the HNC HPAL has a path to net zero by 2030, which they’re working towards. We’re yet to develop a similar pathway, but that’s obviously something that we would be looking to follow. So this sized solar project will provide the bulk of the power behind the sulfuric acid plant, which will provide 60% of the power. So it will leave a little bit left over that would be coal-fired power. And that’s really more just in a reliability issue. Obviously, solar does have limitations in regards to its ability to generate during certain times of the day or at night.
Niel Botha
Perfect. That’s very clear. Thank you very much. I’ll jump back in the queue.
Justin Werner
Yes. I appreciate it.
Operator
There are no further questions at this time. I’ll now hand back to Mr. Werner for closing remarks.
Justin Werner
Thank you, everyone, for your attendance on today’s call. Just to reiterate, I think, once again, record EBITDA from operations, which once again is underpinned by a mature ramp-up on the RKEF operations, but I think importantly, first contribution from our Class 1 mixed hydroxide uptake from the HNC HPAL.
And really the next step into the full diversification into becoming a major Class 1 nickel supplier to the global EV battery market through ENC, which we’ve touched on, we believe is now comfortably funded. And so we look forward to providing further updates on a quarterly basis as to the progress for ENC.
And as I mentioned in regards to potential off-takers and even the minority strategic partners. So thank you, everyone, for your time this evening.
